Many people still expect that government programs, such as Medicare and Medicaid, will pay for their long-term care needs. Unfortunately, these programs provide limited assistance for long-term care needs.

Medicare, the program for those 65 and older, has restricted coverage for stays at long-term care facilities. The coverage generally is only for brief periods of rehabilitation after surgery or injuries. Medicare pays only about 15% of national nursing home expenses. It does not pay much of the cost for those in assisted living facilities or receiving home health care.

Medicaid offers extended long-term care coverage and pays about 45% of total nursing home expenses. But to receive the coverage you must meet the Medicaid asset limits. This generally means you must be impoverished by Medicaid standards. There are strategies people use to qualify for Medicaid, but they became less practical after changes in the law about 10 years ago and even less practical after a 2005 law. Now, it is difficult to qualify for Medicaid without impoverishing yourself long before any coverage is needed.

Medicaid is a joint federal-state program. There are umbrella federal rules, but the states are allowed to add to them by making eligibility more restrictive. You have to know not only the federal rules but any modifications your state makes. In this post, I review the federal rules and some state variations.

Understanding Asset Ownership Limits

First, you generally can’t own assets worth more than $2,000 ($3,000 if you are married). But there are exempt assets you can own that do not count against the limit. The states have some flexibility in setting the details of the definitions of exempt assets.

You are allowed to own household goods and personal effects up to $2,000, one car, term life insurance with a face value of up to $2,000, and a burial plot.

You also are allowed to own a home, up to a point. When a spouse is occupying a house, an unlimited amount of home equity is allowed. If there is no spouse, home equity is limited to $500,000 ($750,000 in some states).

There is no limit on the value of the automobile you can own. Some advisors recommend reducing your non-exempt assets by using cash to purchase an expensive car.

When you limit your asset ownership to these levels, you probably will qualify for Medicaid. But that is not the end of the story. After a Medicaid enrollee dies, the state is allowed to recover from the estate the money Medicaid paid for care. Normally the state limits its cost recovery to the sale proceeds of the enrollee's home. The recovery cannot come from the home, however, if the surviving spouse still is living there. The spouse also can sell the home a year after the enrolled spouse qualified for Medicaid and not owe any money to Medicaid.

Even if the state eventually recovers its costs from the sale of the house, using Medicaid might not be a bad deal financially. The state reimburses nursing homes at a rate far less than private patients pay. That means the eventual reimbursement your estate makes to Medicaid would be lower than the cost of paying the nursing home cost out of your pocket at non-Medicaid rates. For example, the estate might pay Medicaid $90 per day instead of the $200 or more per day you would have paid as a private patient.

Using Trusts

For years, the standard Medicaid qualification strategy was to give assets to family members so the applicant owned no more than was allowed by Medicaid. The assets still were in the family and were preserved for heirs instead of being spent on nursing home care.

This strategy is more difficult now, because of the "look-back" rule. All assets that were given away in the 60-month period before someone applied for Medicaid are considered part of the applicant's assets when reviewing the application. Before the 2005 law, the look-back period was 36 months for outright gifts and 60 months for gifts in trusts. Now, all gifts face the 60-month look-back period.

This makes planning difficult, because you must make yourself impoverished at least five years before entering the nursing home. Any assets transferred during the look-back period result in a waiting period before becoming Medicaid eligible.

Suppose Max Profits transferred $300,000 to his son, Hi, within the look-back period. Suppose the average monthly cost of a nursing home in Max's area is $10,000. The $300,000 is divided by $10,000 to arrive at 30. After Max both enters the nursing home and meets Medicaid eligibility requirements, it will be another 30 months before Max can enroll in Medicaid.

But in some states each month of expenses paid by the applicant or a family member reduces the waiting period by one month. So if Hi begins paying for the nursing home as soon as Max enters it, Max will be eligible for Medicaid after 15 months.

Annuities used to be a way to allow one spouse to become eligible for Medicaid while ensuring income for the other. But the rules now are very limited and have some uncertainty. Buying annuities to game the Medicaid system is a complicated, risky strategy.

In some states, owning a long-term care policy can make it easier to qualify for Medicaid. The Partnership for Long-Term Care program, which is a trial program in some states, allows an applicant to spend down fewer assets if a qualified long-term care policy is in place. For example, if the policy pays $100,000 in LTC benefits, the individual can qualify for Medicaid with $100,000 more assets than other applicants.

Strategies That Work

The best strategy these days is to use Medicaid as a back-up for extended long-term care needs. For the initial care, buy a long-term care policy that covers long-term care for up to five years. Or use a combination of personal assets and a long-term care policy to get you through five years.

When you know you will begin long-term care, you can give your children any assets that exceed the cost of five years of care. After five years in long-term care, you can apply to Medicaid and there will be no gifts in the 60-month look-back period. You won't own assets above the Medicaid limit and will not face a waiting period beyond the first five years.

A benefit of insurance is it covers home care and assisted living care in addition to nursing home care.

The difficulty of qualifying for Medicaid is not the only reason to consider another way to pay for any long-term care. You should ask yourself if you really want to rely on Medicaid. Its reimbursement rates for nursing home care are very low, a fraction of private pay rates. Nursing homes with a lot of Medicaid residents simply cannot afford to offer a lot of quality care at those rates.

Most quality nursing homes will not accept Medicaid patients or limit the number they will accept. These facilities require financial statements proving the applicant is able to pay for several years of care before they will admit the person.

With the difficulty of qualifying for Medicare and the lower quality of care, you might prefer to use long-term care insurance and your own assets to pay for any long-term care. An alternative is to plan to spend your own assets and buy permanent life insurance to provide an inheritance for your heirs.

Bob Carlson is editor of the monthly newsletter Retirement Watch and the web site www.RetirementWatch.com. He also is author of the books The New Rules of Retirement and Invest Like a Fox…Not Like a Hedgehog.